Alaska plays hardball with oil companies

by Joe Carroll and Sinja Franklin

Alaska Gov. Sarah Palin is challenging some of the world's biggest oil companies, and like Venezuela President Hugo Chavez, she's not backing down.
Palin threatened to evict ExxonMobil, the world's biggest oil company, and partners BP, Chevron and ConocoPhillips from a state-owned gas field, winning their promise to increase Alaska's natural gas output 17 %. She raised taxes on oil profits by $ 1.5 bn a year and rejected industry ownership of a $ 25 bn pipeline.

Politicians and energy companies are haggling for revenue with oil more than $ 100 a barrel. ExxonMobil and partners say higher taxes may lead to fewer investments in Alaska, home to the second-largest US reserves behind Texas. None has quit the state. ExxonMobil and ConocoPhillips last year left Venezuela rather than accept lower profits when Chavez seized oil fields.
"We've got to play hardball," Palin, a Republican, says. Alaska relies on the energy industry for 85 % of tax revenue and 33 %of jobs. "The time is right to develop these resources because of the price of fuel."

”That kind of risk”
Palin's approach may backfire, prompting the largest energy companies to decide that Alaska is no longer profitable, says Ron Denhardt, an analyst at Strategic Energy & Economic Research in Winchester, Massachusetts. A pullout would leave the state to smaller companies lacking the skill to maximize oil output and tax receipts, he says.
"The economics of huge projects like these have got to look really good for a company to take on that kind of risk," Denhardt says. "We don't know yet if she's asking for too much."

Palin seeks to auction drilling rights for Point Thomson on Alaska's North Slope to accelerate development of gas reserves with a value of $ 71 bn at current prices. The state hasn't estimated tax revenue from the plan. ExxonMobil and its partners, which won't disclose their return-on-investment requirements, say they are hamstrung by the lack of a pipeline.
"The state is taking a very aggressive stance," says James Bowles, president of ConocoPhillips' Alaska operations. "We see it as a great risk to the investments we make."

ConocoPhillips, based in Houston, will scale back its $ 1 bn Alaska drilling plan for 2008 because of higher taxes, Bowles says.
Doug Suttles, president of BP's Alaska business, said his company is committed to working with the state as oil prices rise.

Small-town mayor
Palin, 44, graduated from high school in Wasilla, Alaska, a town of 6,700 that's 40 miles north of Anchorage. The Iditarod Trail Sled Dog Race starts there each March. She left home to attend the University of Idaho. Palin returned home and became mayor in 1996, her highest elected office until being sworn in as governor in December 2006.
Chavez, 53, was jailed in 1992 for leading an unsuccessful military coup and was elected president 6 years later. He forced six US and European oil companies last year to surrender operating control and majority stakes in fields that pump about $ 365 mm of crude a week. ConocoPhillips and ExxonMobil left the country. Chevron, BP of London, Norway's StatoilHydro and France's Total accepted the arrangement.

Difference in tactics
Palin says there's a difference between her tactics and the strategy of Chavez, an admirer of Fidel Castro who says he wants to use Venezuela's oil wealth to usher in "21st-century socialism."
"We have a democratic government in Alaska, a representative form of government here in America, where we would never take over from industry," Palin says. "But we have the right to demand that provisions in leases are adhered to."

”Our laws”
Venezuela's seizure of property was democratically approved because "a majority of our people voted for our constitution and our laws," Energy and Oil Minister Rafael Ramirez says.
Palin took on the energy industry right away, discarding a $ 25 bn pipeline agreement negotiated by her Republican predecessor, Frank Murkowski, calling it too generous. The accord would have violated the state constitution by freezing corporate natural-gas taxes for more than three decades, says Jerry McBeath, co-author of The Political Economy of Oil in Alaska: Multinationals vs. the State, to be released this month.
"She came into office on an insurgent campaign and took the ethical high road by saying there will be no secret deals," McBeath says. "This is unusual in the history of this state."